Capitalism Goes Green?

Common-sense eco-fixes in the economic toolbox

by Jeff Gersh, reprinted from The Amicus Journal, with permission


n 1990, Yale economist William Nordhaus calculated that the cost of sta- bilizing carbon dioxide emissions in the United States would slash the country's gross domestic product by $200 billion a year. Nordhaus is no Rush Limbaugh; a few years later, he joined 2,500 other economists in signing a statement calling for action to curb global warming. Regardless, to the Bush Administration his calculation sounded like a warning of economic apocalypse. Whatever political will might have existed for cutting fossil fuel use was paralyzed when Nordhaus, released his figures.

As any Econ 101 student knows, however, the number you come up with at the end of a calculation depends on the information you begin with. Amory Lovins of the Rocky Mountain Institute has also figured the cost of stabilizing carbon dioxide emissions but his number is the mirror image of Nordhaus's. Taking this step to reduce global warming, says Lovins, would save the nation $200 billion.

Why the difference? Lovins, who is among the world's leading experts on energy efficiency, says that Nordhaus "hadn't used the vast empirical literature on how much it actually costs to save energy, as measured and documented by thousands of utilities and industries." For his own calculations, Lovins applied this literature to find out what would happen if the country were to take advantage of energy-saving measures that aren't used today because of failures in the market.

Contractors, for instance, have little incentive to install extra insulation in new homes, because they don't pay the heating bills. Manufacturers are not inclined to bring more efficient (but initially more expensive) household appliances into mass production, because there is no guarantee that consumers will make good the expense of retooling the factories. But when a state energy department issues a regulation requiring that all new homes be insulated to a higher level, as California has consistently done at the urging of environmentalists; or when electric utilities offer rewards to companies that come out with the most efficient new home appliances on the mass market, as several have done throughout the 1990s in a program originated by Natural Resources Defense Council then the whole playing field changes.

Add up Nordhaus's and Lovins's calculations, and you can't escape the conclusion that, at least where energy is concerned, changing the economic playing field is worth $400 billion. That figure doesn't even include the value of the benefits of curbing global warming, which are off the scale.

Sometimes, it seems, the invisible hand of the market needs a little help.

In recent years, there has been an upsurge in the number and sophistication of proposals for redirecting market forces so that they wreak less environmental destruction. Many of these ideas have emerged from two burgeoning schools of green economic thought, environmental economics and ecological economics.

So pervasive has the eco-economic idea become that, in 1995, J. Andrew Hoerner surveyed state tax codes for Amicus and found more than 250 green tax measures in use, from stringent levies on leaking underground storage tanks to incentives for clean technology such as wind power. So politically powerful is it that even Christie Whitman Republican governor of New Jersey and an avowed proponent of low taxes and small government is a convert: in 1998, she tried to push through a gasoline tax whose revenues would have gone to preserve green space in the state. Though the legislature turned down the tax, a similar proposal later passed as a ballot measure.

Below, Amicus takes a look at the current state of economic tools for protecting the environment.




Especially today, in an age when centrally managed pension and mutual funds own an enormous portion of corporate America, CEOs are under constant pressure from stockholders to drive up the productivity of their companies. Heading the fist of preferred methods these days is "downsizing" Between 1979 and 1995, according to the San Francisco-based think tank Redefining Progress, the manufacturing labor force in the United States shrank by 12 percent even as manufacturing output rose a startling 43 percent. Interestingly, industrial energy use rose by nearly the same percentage as the labor force declined. And industrial and commercial energy use as a whole has gone up 37 percent since 1983.

These are the kinds of numbers that trouble eco-entrepreneur Paul Hawken. "Using more resources to make fewer people more productive flies in the face of what we now need," he claims. "It is people we have more of, not natural resources. Hawken, along with many another environmental thinker, wants leaders of industry and government to start wringing far more productivity from energy and materials. In a 1997 report to the Club of Rome called Factor Four, Ernst von Weizsacker and Amory and Hunter Lovins argue that, even with current technology, we could become four times more efficient in our use of resources. Amory Lovins estimates that Americans waste about $1 trillion annually on unnecessary energy alone. Conservative estimates of the Intergovernmental Panel on Climate Change back him up: "Energy efficiency gains of 10 percent to 30 percent could be achieved over the next two to three decades at negative to zero net cost."

But how do we get there?

Some steps toward resource efficiency will be taken simply because they make excellent bottom-line sense. One example: a growing sector of industrial ecology called "remanufacturing." Taking the logical next step from recycling, manufacturers are designing components so they can be easily removed, rebuilt, and reused. In the case of a new digital copier produced by Xerox, that means some parts are more expensive to produce. But the savings come later, says Jack C. Azar, Xerox's director of environment, health, and safety. Azar commented to a New York Times reporter that, "In the long run, it is cheaper to reuse a part than to recycle it."

Many such improvements, however, cannot just be left to the market. They will require some form of common-sense tinkering. Consider the $1 billion Americans spend every year just for "standby power" the juice that allows TVs and VCRs, among other things, to communicate with remote control devices. This is a ludicrous figure, but there is no straightforward way to reduce it under current market conditions. On the one hand, Americans would probably rise up in arms rather than go back to the bad old days of turning on the TV by hand. On the other, while the cost of altering new appliances so as to cut their standby power demand by half or more is almost nil, a classic market failure has so far prevented change: manufacturers have no incentive to make improvements, because standby power costs too little on a monthly electricity bill for individual consumers to complain about it. And so the Environmental Protection Agency (EPA) has stepped in. Thanks to an agreement EPA has negotiated with the manufacturers, the technological fix will soon be implemented and standby power demand will start to drop.

Hundreds of other opportunities exist. To take advantage of them, environmentalists and economists have devised myriad ways to move the market away from waste and toward efficiency. There are old-fashioned mandatory statutes, such as New York City's recycling law, or California's requirement that auto manufacturers start producing electric cars. There are consumer-outreach campaigns, such as EPKs Energy Star program, which promotes energy-efficient household appliances.

There are demonstration projects, such as the Habitat for Humanity house that uses building panels and wood trusses prefabricated housing components that require only three-fourths the amount of wood used in traditional framing techniques, and which save at least $3,300 per house. There are market incentives, such as the regulatory fixes NRDC helps state utility commissioners craft, which eliminate unnecessary conflicts between the financial health of a utility and improved energy efficiency in its customers' homes and businesses.

Any number of other ideas are fermenting. One efficiency optimist, eco-architect William McDonough, argues that industrial processes can and must become more efficient over time because, fundamentally, it makes no sense for companies to waste anything that could be used as a resource. A cloth factory he designed, in Switzerland, is so efficient that the water leaving the mill is cleaner than the tap water going in. "I see any emission as a signal of inefficiency," he told Nation's Business Magazine. "To me, it's a design opportunity."


Subsidies and incentives


"The U.S. spends about $100 million a year on photovoltaic [solar energy] research," says Lewis and Clark College professor Eban Goodstein. "That's the price of about two miles of interstate highway." Goodstein, an ecological economist, notes that in spite of this almost complete neglect, photovoltaics have made enough headway that the price of solar energy has come down precipitously from about 25 cents per kilowatt-hour in the 1980s to between 7 and 9 cents today. What's at stake here? Says Goodstein, "If you had the price down to 3 to 4 cents a kilowatt-hour, you've basically solved the global warming problem."

Nurturing the development of environmentally sound technologies such as photovoltaics, wind power, and organic farming techniques is an excellent means of leveraging significant environmental improvements with relatively small investments. In the late 1970s and early 1980s, for instance, California ran a highly successful program to commercialize wind power, which brought the price of a wind-generated kilowatt-hour down to under 5 cents. Perhaps in part because of that early R&D program, wind power recently became the fastest-growing energy source in the world.

But where do US. government subsidies go? Overwhelmingly, to support the environmental status quo. Our so-called "free market" is riddled with subsidies. Low-cost leasing of public lands for oil extraction and cattle grazing makes oil and cattle artificially attractive investments. Federal grants make it easy to build highways and ever more highways, while mass transit receives just a fraction of transportation funding. The federal government presently subsidizes traditional energy-supply activities to the tune of $30 billion a year. Subsidized road-building in the national forests lost taxpayers $88 million in 1997 alone.

Fiscally, ending subsidies like these should be an easy call. In its latest yearly report, Friends of the Earth estimates that taxpayers would save some $50 billion by phasing out environmentally harmful spending programs. Even the director of natural resource studies at the Cato Institute a highly conservative think tank that rarely finds itself aligned with environmental groups has stated that " it makes no sense for the federal government to subsidize environmental destruction on the one hand, while establishing laws, regulations, and vast bureaucracies to mitigate it on the other."


Labels and taxes


Instead of markets giving us proper information about how much our suburbs, spandex, and plastic spring water bottles truly cost," eco-entrepreneur Paul Hawken has said, "everything else is giving us proper information our beleaguered air and our threatened watersheds, the overworked soils, the deracinated inner cities and rural counties, the breakdown of stability worldwide, the conflicts based on resource shortages; all these are providing the information that our prices should be giving us but don't.'

Like smoke in a room, every individual's consumer decisions dissipate across landscapes, airsheds, and oceans. All that beef, all that gasoline, all those February tomatoes have a potent cumulative effect. In environmental bureaucratese, a smokestack or sewage outlet is a "point source" of pollution, obvious, fixed, and relatively easy to control; but every American acts as a kind of mobile, long-range source of incremental damage that is usually invisible to the doer. The consequence of Americans' outsized consumption of natural resources, says MIT professor of economics Paul Krugman, is that some form of public action to protect the environment against the consequences of the individual pursuit of self-interest is crucial."

There are many ways to make those faraway environmental costs more concrete for consumers. One is the eco-label, a seal of approval certifying that a product meets a particular set of environmental standards. For instance, Germany uses a government-regulated logo called the "Blue Angel," which, after twenty years in use on products from mercury-free thermometers to natural-gas buses, has become the most prevalent such label in Europe. Two critical components of its success are the facts that a product must undergo meticulous, third-party scrutiny before it earns the label, and that the certification standards are continually upgraded. A product that won a Blue Angel in 1982 will not necessarily make the grade in 1999.

In this country, there is the recycling label almost meaningless by itself, since it can be applied not only to recycled products but also to those that are merely "recyclable." But the information that supplements it, such as what percentage of post-consumer recycled material the product contains, is regulated by the Federal Trade Commission and is far more rigorous. The United States also has Green Seal, an independent nonprofit that has so far certified more than 300 products in this country, including Sherwin-Williams paint, Andersen windows, and Carrier air conditioners.

The success of an eco-label, however, depends on consumer awareness and good will. In a recent poll, 51 percent of consumers said that the Blue Angel has a major effect on their buying; but research on actual purchasing practices has not borne out that claim. Green Seal, though an energetic and committed group, has had very limited market reach and visibility.


nother means of redirecting con- sumer and industry choice is taxes. Green economists advocate a "tax shift" an overall restructuring of the tax code so that it becomes more costly to harm the environment, less costly to generate income. As University of Maryland economist Herman Daly puts it, nations should shift their tax bases away from labor and capital ("the things you want") and toward pollution and other environmental ills. In essence, he says, countries should charge rent for their resources: for the use of water or the use of the atmosphere as a dumping ground for air pollution. These eco-levies would help correct the tendency of industry and consumers to take natural resources for granted because, after all, they're "free."

The tax shift idea is catching on in Europe. Sweden and the Netherlands have both instituted stringent carbon taxes. A 1994 European Commission study found that if a nation used the monies from a modest carbon tax to reduce employers' social insurance payments, unemployment would drop by 2 to 2.7 percent. German Chancellor Gerhard Schroeder has said he plans to use revenues from energy taxes to do just that. Even the Russian Duma requested a paper from Daly on the tax shift concept for its hearings on tax reform.

Among those incubating tax shift ideas in the United States is Redefining Progress. The think tank proposes a $70/ton tax on carbon, to be phased in over five years. By the fifth year, the new tax would raise $83 billion a sum large enough to replace some 10 percent of current federal tax revenues. The average cost to a single family for its energy consumption would be about $503 annually. But the $83 billion raised could be used, for instance, to exempt the first $5,000 of every wage earner's income from the payroll tax for Social Security and disability insurance. Says Jeff Hamond, director of fiscal policy research: "Common sense dictates that you get less of what you tax and more of what you don't. If we started to pay taxes based on the debts we are imposing on the future, rather than our incomes, it would restore a sense of fairness, true-cost accounting, and 'pay-as-you-go' government that the current system lacks. "


Emissions trading


One eco-economic tool particularly beloved of industry and of many green economists, too, at least in theory is emissions trading. When the 1990 Clean Air Act amendments set an overall national limit on the amount of sulfur that could be emitted into the atmosphere, they also called for a system that would allow sulfur emitters (mostly coal-burning power plants) to trade pollution rights among each other. The idea is that those for whom it is easy and cheap to cut pollution will profit by it, while those for whom it is difficult and costly will buy themselves some leeway, and, as the cap is gradually lowered, the market will find the most economically efficient way to achieve the overall environmental goal. Sulfur emissions credits are now exchanged among utilities and speculators at the Chicago Board of Trade.

Emissions trading has been controversial among some environmentalists. Many object that it establishes a "right" to pollute (though any standard air- or water-pollution permit does essentially the same thing). Moreover, unless the system is strictly set up and strictly policed, it can invite unequal trades. For instance, some U.S. companies like the idea of a carbon dioxide trading system that would let them plant trees in developing countries to absorb carbon, rather than cut emissions at their plants a green-sounding concept that would do nothing to solve the paramount problem of U.S. fossil fuel use. But the most intractable flaw with emissions trading may be that it tends to concentrate pollution at the dirtiest plants, leaving the people downwind of those plants out of luck. Indeed, the main utility on Long Island has refused to sell its pollution credits, since they tend to end up at the Midwestern coal plants whose emissions cause so much acid rain on the eastern seaboard.

Still, emissions trading has won many converts, and we are likely to see more of these systems in the future. One thought-provoking variation has been proposed by Peter Barnes, a cofounder of Working Assets who is working with the Corporation for Enterprise Development, a Washington, D.C.-based nonprofit devoted to environmentally sustainable economic development. Barnes argues for citizen ownership of the sky that is, of the carbon emissions rights that will be created once an international global warming treaty puts a cap on U.S. carbon output. Instead of grandfathering these rights to existing polluters a colossal giveaway of a public asset worth $1 trillion Barnes proposes turning them over to a "sky trust" that would manage them on behalf of every man, woman, and child in the country. Companies would have to buy emissions rights at market price, and trustees would distribute the dividends to the public, much as the Alaska Permanent Fund pays oil royalties to every Alaskan. "We can squander our inheritance or preserve it," Barnes writes in the American Prospect. "We can give big chunks of it to a fortunate few, or smaller but equally sized pieces to all shareholders of America, Inc."




Any eco-economic proposal for genuine environmental progress faces the same near immovable object as any other proposal for change: the opposition of those who are doing well under the status quo. "There are a lot of good policy ideas" says Lewis and Clark's Eban Goodstein, "but they often run up against big vested interests. For example, the idea of subsidizing solar energy runs up against a massive fossil fuel lobby that determines energy policy in the U.S. Goodstein believes that the country needs campaign finance reform before it can achieve environmental change on a grand scale.

Dartmouth environmental scientist Donella Meadows is still more emphatic: "The first priority is campaign reforms. We're lost until we get democracy back."

But industry is not the only party with vested interests. As politically difficult as it may be to carry out the "factor four" efficiency recommendations of the energy experts, ecological economists such as Herman Daly believe our use of resources must be reduced by a factor of ten if we are to ward off catastrophic global warming. Factor ten is likely to require more stringent steps than eco-labels, and to hurt worse than efficiency. It will not be compatible with the current U.S. trend toward ever more conspicuous consumption bigger SUVs, bigger houses, more electronic equipment.

In 1998, Dr. Paul Ray of the research group American Lives was commissioned, along with the firm Porter Novelli, to carry out focus group studies on the country's movement toward environmentally sustainable development. According to the draft findings, people "desire to have a technological solution, which promises more benefits and only a little expenditure and a little behavior change."

The implications of this attitude, in the richest, most resource-intensive country in the world, are grave. "The denial of limits to growth is driven by a fear of having to give up something," says Daly, in a voice somewhere between anger and empathy. "We've opted to substitute a technical solution growth for a moral solution sharing. But the technical solution has hit the end of its rope." In other words, it is time for Americans not only to become more efficient, to do more with less, but also to do less with less. The question arises: Just how green are Americans prepared to be?

  Jeff Gersh lives in Portland, Oregon. He is producing a documentary film on suburban sprawl in the West.

The Amicus Journal is published quarterly by the National Resources Defense Council, 40 West 20th St, New York, NY 10011. NRDC is a national nonprofit organization dedicated to protecting the world's natural resources and ensuring a safe and healthy environment for all people. Membership dues are $10 annually; members receive The Amicus Journal. Non-member subscription is $10.